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The Card Game Navigator

A list of resources from around the Web on the consumer credit industry, as selected by the personal finance columnist Ron Lieber.

Debit Cards

• Tips for Avoiding Overdraft and Bounced-Check Fees
• Federal Reserve
• Guide to Debit Card Rules
• U.S. PIRG
• Report on Debit Cards and Overdrafts
• Center for Responsible Lending
• Federal Joint Guidance on Overdraft Programs
• Federal Reserve, Feb. 2005 (pdf)
• Report on Disclosure Documents for Checking Account Customers
• General Accounting Office, Jan. 2008 (pdf)
• Proposal on Overdraft Fees
• Federal Reserve, Jan. 2009 (pdf)
• 2008 Study of Bank Overdraft Programs
• FDIC (pdf)

How Visa, Using Card Fees, Dominates a Market

By ANDREW MARTIN

When you sign for a debit card at a retailer, the store pays your bank more than twice as much as when you enter a PIN – a strategy Visa hatched decades ago.

January 4, 2010 Your MoneyNews

Card Fees Pit Retailers Against Banks

By ANDREW MARTIN

As the use of credit and debit cards has grown over the last decade, merchants argue that the attendant fees have sharply lifted the cost of doing business.

July 16, 2009businessNews

Video

Visa Reigns with Silent Tax

The growing use of debit cards has meant big profits for Visa, and there are concerns that the company’s market power has led to unnecessarily high fees to merchants.

Credit and debit cards have become a profitable machine for the financial services industry, sometimes at the expense of consumers who can least afford it. Even as Washington considers clamping down on deceptive practices, financial firms are finding new ways to generate revenue from their cards. Articles and multimedia offerings in this series, which is part of a joint reporting project with PBS “Frontline,” will examine the changing world of the consumer credit business.

The Card Game series is a joint reporting project with the PBS program “Frontline.” Watch the documentary that was broadcast Nov. 24 here: pbs.org/frontline/creditcards.

The Card Game series is a joint reporting project with the PBS program “Frontline.” Watch the documentary that was broadcast Nov. 24 here: pbs.org/frontline/creditcards.

Every day, millions of Americans stand at store checkout counters and make a seemingly random decision: after swiping their debit card, they choose whether to punch in a code, or to sign their name.

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Your Money Guides

Credit and Debit Cards »

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Monica Almeida/The New York Times

Mitch Goldstone, in his digital photo-processing shop in Irvine, Calif., is part of a suit against Visa and MasterCard.

The Card Game series is a joint reporting project with the PBS program “Frontline.”

Multimedia

Graphic

Becoming the Debit King

Graphic

Toward a Cashless Society

Related

You’re the Boss: Does Visa Play Fair?

More Articles in This Series

Readers’ Comments

“Smart retailers take advantage and offer a ‘discount’ on debit purchases. Sharing the savings with the customers is a great incentive.”

Tom, Texas

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It is a pointless distinction to most consumers, since the price is the same either way. But behind the scenes, billions of dollars are at stake.

When you sign a debit card receipt at a large retailer, the store pays your bank an average of 75 cents for every $100 spent, more than twice as much as when you punch in a four-digit code.

The difference is so large that Costco will not allow you to sign for your debit purchase in its checkout lines. Wal-Mart and Home Depot steer customers to use a PIN, the debit card norm outside the United States.

Despite all this, signature debit cards dominate debit use in this country, accounting for 61 percent of all such transactions, even though PIN debit cards are less expensive and less vulnerable to fraud.

How this came to be is largely a result of a successful if controversial strategy hatched decades ago by Visa, the dominant payment network for credit and debit cards. It is an approach that has benefited Visa and the nation’s banks at the expense of merchants and, some argue, consumers.

Competition, of course, usually forces prices lower. But for payment networks like Visa and MasterCard, competition in the card business is more about winning over banks that actually issue the cards than consumers who use them. Visa and MasterCard set the fees that merchants must pay the cardholder’s bank. And higher fees mean higher profits for banks, even if it means that merchants shift the cost to consumers.

Seizing on this odd twist, Visa enticed banks to embrace signature debit — the higher-priced method of handling debit cards — and turned over the fees to banks as an incentive to issue more Visa cards. At least initially, MasterCard and other rivals promoted PIN debit instead.

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Visa has managed to dominate the debit landscape despite more than a decade of litigation and antitrust investigations into high fees and anticompetitive behavior, including a settlement in 2003 in which Visa paid $2 billion that some predicted would inject more competition into the debit industry.

Yet today, Visa has a commanding lead in signature debit in the United States, with a 73 percent share. Its share of the domestic PIN debit market is smaller but growing, at 42 percent, making Visa the biggest PIN network, according to The Nilson Report, an industry newsletter.

The Risk of Refusing

Critics complain that Visa does not fight fair, and that it used its market power to force merchants to accept higher costs for debit cards. Merchants say they cannot refuse Visa cards because it would result in lower sales.

“A dollar is no longer a dollar in this country,” said Mallory Duncan, senior vice president of the National Retail Federation, a trade association. “It’s a Visa dollar. It’s only worth 99 cents because they take a piece of every one.”

Visa officials say its critics are griping about debit products that have transformed the nation’s payment system, adding convenience for consumers and higher sales for merchants, while cutting the hassle and expense of dealing with cash and checks. In recent years, New York cabbies and McDonald’s restaurants are among those reporting higher sales as a result of accepting plastic.

“At times we have a perspective problem,” said William M. Sheedy, Visa’s president for the Americas. “Debit has become so mainstream, some of the people who have benefited have lost sight of what their business model was, what their cost structure was.”

Visa officials said the costs of debit for merchants had not gone down because the cards now provided greater value than they did five or 10 years ago. The costs must not be too onerous, they say, because merchant acceptance has doubled in the last decade.

The fees are “not a cost-based calculation, but a value-based calculation,” said Elizabeth Buse, Visa’s global head of product.

As for Visa’s market share, company officials maintain that it is rather small when considered within the larger context of all payments, where, for now at least, cash remains king.

While Visa may be among the best-known brands in the world, how it operates is a mystery to many consumers.

Visa does not distribute credit or debit cards, nor does it provide credit so consumers can buy flat-screen televisions or a Starbucks latte. Those tasks are left to the banks, which owned Visa until it went public in 2008.

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Sign in to Recommend Next Article in Your Money (5 of 28) » A version of this article appeared in print on January 5, 2010, on page A1 of the New York edition.

By COLLEEN DEBAISE

Read an excerpt from THE WALL STREET JOURNAL COMPLETE SMALL BUSINESS GUIDEBOOK (Three Rivers Press).

The economic downturn has dimmed many entrepreneurs’ hopes of opening a small business, as sources of funding have dwindled or dried up completely. And while many hope 2010 will be better, the outlook continues to be bleak.

The majority of entrepreneurs use personal savings or contributions from family or friends to fund their ventures, but personal wealth, often connected to the value of stock portfolios or homes, hasn’t bounced back.

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Kenneth MacKinnon

Kenneth MacKinnon, who wants to open a restaurant, networks with chefs on a fishing trip near Los Angeles.

Meanwhile, banks—under scrutiny by regulators—are continuing to strengthen capital reserves, making it difficult even for entrepreneurs with track records and years of experience to qualify for loans. And professional investors, stung by the financial meltdown, are meting out fewer capital infusions.

Kenneth MacKinnon moved to Los Angeles over two years ago with plans to start a tapas wine bar, but despite a high credit rating and collateral, including a home, the Scotland native says he has been unable to secure the $300,000 he needs from banks or private investors.

“The money supply has been shut off,” says Mr. MacKinnon, who had run a successful seafood eatery for 15 years in the U.K. that he sold in 2007 before moving to the U.S.

Funding from angel investors, or high-net-worth individuals who provide capital to young companies, fell 30% to $9.1 billion in the first half of 2009 compared with the same period a year earlier. That figure is expected to remain flat for 2010, according to Jeffrey Sohl, director of University of New Hampshire’s Center for Venture Research, which tracks the data.

Small Business Guidebook

• For More Workers, Home Is Where the Office Is

What is encouraging, Mr. Sohl says, is the number of deals has ticked up slightly. While angels are investing less—$370,000 per deal in 2009, versus $530,000 in 2008—about 24,500 ventures received funding during the first half of 2009, compared with 23,100 the year earlier.

“They are still doing the deals, but the deals are much cheaper now,” he says.

Venture capitalists, too, are continuing to invest, but typically in later-stage companies already in their portfolios rather than new prospects, says Mr. Sohl. The average deal size declined to $5.7 million in the first half of 2009, compared with $7.4 million to $7.8 million between 2005 and 2008.

As for Small Business Administration-guaranteed loans or conventional bank loans, the best thing about 2010 is that it won’t be 2009, says Bob Coleman, publisher of “The Coleman Report,” a La Canada, Calif., trade publication for SBA lenders. “We’re better off than where we were 12 months ago, but we are nowhere near where we were two years ago,” he says.

The SBA approved less than 45,000 loans for the 12 months ended Sept. 30, down 36% from a year earlier. Total volume for its flagship 7(a) loan was $9.3 billion, off year-ago levels by $3.4 billion.

Stimulus-related measures, however, contributed to an uptick in SBA lending in recent months. Mr. Coleman expects that trend to continue for 2010.

But SBA loans make up only about 1% of overall small-business lending, Mr. Coleman estimates. That figure may grow to 5% to 10% in 2010 as the government provides more incentives for financial institutions, especially community banks, to provide financing to small businesses, he says.

Still, getting the money may be a challenge. “Whether it’s an SBA loan or a conventional loan, you really have to be perceived as the ‘cream,’” Mr. Coleman says. Start-up entrepreneurs in particular will have to show they have a significant amount of their own savings in the venture, plus solid cash-flow projections, he says.

Maria Coyne, executive vice president and head of SBA lending at KeyBank in Clevand, agrees that start-up entrepreneurs will have to have a solid plan and assets. “They’ve got to get a good hunk of skin in the game, too,” she says.

Babson College in Wellesley, Mass., estimates that entrepreneurs need on average $65,000 to start a business, two-thirds of which comes from personal savings and the rest from “informal” investors such as relatives and friends.

Although the stock market is starting to recover, housing values remain weak. Two years ago, relatives were more willing to invest because “they might have seen they had a couple hundred thousand dollars in equity in their house,” says Babson entrepreneurship professor Andrew Zacharakis. “Today, that’s a scarier proposition.”

Lack of access to capital will also likely hamper entrepreneurs interested in buying a franchise, says Matt Shay, president of the International Franchise Association in Washington. The group estimates 2% growth in franchises for 2010 to over 901,000 establishments. That’s better than zero growth in 2009, but off the average 5.6% growth per year from 2001 to 2005.

In the past, potential franchisees could finance a purchase if they could put 15% to 20% down. Now, banks require large down payments of between 40% and 50%, Mr. Shay says.

Babson’s Prof. Zacharakis says he’s seeing companies doing more with less, including asking friends and family to work for free. “Instead of capital infusions, there might be a lot more exchanges of services or trading favors,” he says.

In Los Angeles, Mr. MacKinnon says he’s considering taking on partners so he can open his long-planned bar. Instead of starting from scratch, he might invest in a failed restaurant.

University of New Hampshire’s Mr. Sohl says he believes “we’re done with the downdraft,” though he remains cautious for 2010. “People aren’t ready to bet the farm,” he says.

Write to Colleen DeBaise at colleen.debaise@wsj.com